Vendor managed inventory (VMI) systems generally allow product suppliers to manage inventory levels and plan replenishment of products for the retailers. VMI systems first appeared in the 1980s with the goal of shifting some of the burden of product replenishment away from retailers and into the hands of the vendors. Early VMI systems used point of sale (POS) data to decrement an onhand quantity (i.e. perpetual inventory) until that decremented quantity dropped below a safety stock level. Once the quantity dropped below the safety stock level, an order was generated if economic order quantity and optimum stocking unit restrictions were met.
Today, most large retailers do not stock excess inventory primarily because of high inventory carrying cost. As a result, it is particularly important that replenishment of items on shelves be sufficient to meet demand yet not be overly abundant so as to cause excess inventory. Ideally, there would be no excess inventory, but there would always be an item available to meet demand.
In attempting to meet this ideal, VMI systems examine sales data at the product level. This is problematic, however, because the demand for a particular product on a particular shelf can vary significantly among stores and even among shelves in the same store. In traditional VMI systems, suppliers had no visibility or insight into shelf level inventories in part because the information was not available, was too voluminous to handle, and was too dynamic. Thus, replenishment calculations often left too much inventory on some shelves and too little inventory on others. The problems were exacerbated by the fact that a particular item could sell well in one area of a store and poorly in another area of the same store.